In past downturns, Mr. Geithner argued in a speech in New York at the Council on Foreign Relations, governments have been too conservative and reacted too slowly. “They put the brakes on too soon,” he said. “We won’t do that.”

A first goal for Geithner and Federal Reserve Chairman Ben Bernanke is to try to stabilize the world financial system. On Thursday, Geithner is set to lay out the Obama administration’s framework for dealing with the type of systemic risk posed by nonbanking companies such as AIG, the failed insurance company into which the US government has poured $170 billion. The Obama plan will broaden oversight to include institutions such as insurance companies or hedge funds whose demise could cause a negative cascade effect in the broader economy.

The problem is not just a US problem. Geithner noted that if nations do not act together on oversight, companies will merely move offshore to avoid regulation. Thus, he sees in the current economic crisis a window of opportunity “to begin the process of getting a consensus” on how to fix the overall system.

About $5 trillion in loans are either delinquent or will be at some point, estimates economist Mark Zandi of Moody’s Economy.com. Half of those are in the US and half are in the rest of the world. “Not all of those loans will default and be a loss,” he says, estimating actual losses may total $2.4 trillion to $2.5 trillion.

Trade down 9 percent

The bad loans come against a backdrop of dismal global economic projections: The World Trade Organization (WTO) said this week that world trade will shrink by 9 percent, the largest percentage decline since World War II.

“The contraction in developed countries will be particularly severe, with exports falling by 10 percent this year,” the WTO said in its annual report, issued Monday. “In developing countries, which are far more dependent on trade for growth, exports will shrink by some 2 percent to 3 percent in 2009.”

As global trade dwindles, global protectionism is on the rise, despite nations’ pledges not to raise trade barriers. Even some members of Congress tried to insert “Buy in the USA” provisions into the economic stimulus package that was signed into law on Feb. 17.

“Examples of it are everywhere, but so far it’s been contained,” says Mr. Zandi.

First postwar global downturn

For the first time in 50 years, the International Monetary Fund is predicting that the world economy will shrink. The IMF’s revised forecasts will say the global economy will contract by 0.5 to 1 percent in 2009, IMF managing director Dominique Strauss-Kahn said Monday. The decline will be sharpest in developed countries, including the US and Europe, which will shrink by 3 percent.

To reinvigorate the economy, the Federal Reserve started Wednesday to buy as much as $300 billion in long-term Treasury bills. Just before the Fed made that announcement on Tuesday, the US Treasury sold $40 billion in two-year securities at an interest rate of 0.949 percent. Some 53 percent of buyers were foreigners.

This is a widely watched number, since Zhou Xiaochuan, governor of China’s central bank, suggested on Tuesday that the world needs a new global “supercurrency” to replace the dollar.

Geithner, who had not read the proposal, did not immediately dismiss the idea during his talk on Wednesday. He said the governor was “very thoughtful, pragmatic.” He added, “Anything he is thinking about deserves consideration.”

Geithner backtracks

After the US dollar fell sharply on his comments, however, Geithner backtracked. The US dollar, he said, would still be the dominant reserve currency. The US just has to make sure the rest of the world is confident in its economic policy, he added.

A proposal for a supercurrency is not likely in the foreseeable future, says Zandi. The Chinese “are concerned about the devaluation of the US dollar,” he says.

Of all the issues on the plates of world economic leaders, the issue of bad loans is the one getting the most attention.

The British plan, unlike the US Treasury’s partnership with the private sector, relies on taxpayer money to insure two major banking groups – Royal Bank of Scotland and Lloyds Banking Group – against future losses on £600 billion in poor loans and investments.

Other banks have until March 31 to join the plan, called the Asset Protection Scheme, and speculation is mounting that Barclays will do so after it raises the capital needed to pay the fees required to join.

Big British stimulus

The scale of the British government’s plan has largely overshadowed other initiatives in Europe.

The picture is clouded when it comes to measuring the impact of the crisis and how to deal with it, in part because monetary policy for as many as 16 countries is decided by the European Central Bank.

The German government in October set up a 500 billion-euro ($682 billion) bank-rescue fund made up of loans and guarantees, and German Chancellor, Angela Merkel has said she is “interested” to see how the US plan to remove “toxic assets” works, adding that any such plan must ensure that the “burden” doesn’t fall on the taxpayer.

The urgency of the situation has led the Irish government to consider the establishment of a “bad bank” to manage the bad assets, among other proposals.

Some in London were buoyed by the strong response of the US securities markets after Geithner announced his plan Monday to cope with banks’ bad assets. The US stock market rose sharply.

“Many would assume that if it’s good for the US economy, then it’s good for the world economy,” says Julian Jessop, chief international economist at Capital Economics, an independent research consultancy based in London.

Now that the world is dealing with the banking-sector problems, the next issue that has to be dealt with is the financial fallout in bread-and-butter areas of the real economy, he suggests.

“For example, more mortgage loans are going to be lost as the recession bites, while unemployment will be a major issue,” he says.

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